The ratings take into account implicit support available to AKBL from its principal shareholder, Fauji Foundation Group (FFG). Since the bank’s acquisition, the group has demonstrated its capacity and willingness to support AKBL through equity injection. FFG is one of the largest business conglomerates in Pakistan with a well diversified and strong presence in various sectors of the economy. Moreover, entities operating under the umbrella of FFG largely have robust financial profile.

Following the change in shareholding, there was a change at the helm of the institution. The incumbent President has taken various initiatives to strengthen financial profile of the bank. These include cleansing of balance sheet by making substantial provisions to cover prior losses and enhancement of recovery efforts by revitalizing Special Asset Management Division. A well rounded strategy on the business front is also being rolled out which entails penetration in reputable corporate groups/entities with clean repayment history; to enhance bank’s fee based income, the management intends to tap trade related commercial clientele. Meanwhile, the bank is also venturing into public infrastructural projects. In order to ensure that credit risk remains within the bank’s appetite, the risk management framework has also been strengthened. These initiatives while enhancing core profitability are expected to keep asset quality under check. Stability in top management and the new board of directors is considered pivotal in effective implementation of the bank’s long-term strategy.

Although deposit profile features relatively high concentration, deposit related to armed forces maintained with the bank have remained stable which somewhat mitigates risk associated with concentration. Recently, the management has shed some high cost deposits, which has enabled the bank to improve proportion of CASA in 1Q14. AKBL, in line with peers, has also been able to achieve reduction in cost of deposits.

The bank’s investment portfolio is mainly concentrated in T-bills. The overall PIBs portfolio is close to one fifth of aggregate investments that continues to pose interest rate risk. The decline in portfolio duration has reduced interest rate risk on a timeline basis; given the interest rate volatility in the market, this may be considered a prudent strategy. The management’s strategy regarding equity portfolio entails investment in high volume stocks using a target price selling discipline. The listed equity portfolio largely comprised dividend yielding scrips with strong fundamentals. Income from capital market operations has been supporting the bank’s bottom line in the on-going year.

The erosion in equity base emanating from losses incurred in 2013 was largely recouped by capital injection from sponsors. The above mentioned steps taken by the management are expected to help in maintaining the current level of capital adequacy ratio (CAR) through internal capital generation while allowing the bank to undertake a measured pace of growth. However, further meaningful capital injection from the primary sponsor will help in realizing the growth targets laid down by the bank, providing impetus to earnings stream and enhancing risk absorption capacity. The future direction of ratings will largely depend on the potential drift in overall risk profile of the bank.

For further information on this rating announcement, please contact Ms. Sobia Maqbool, CFA at 021-35311861-70 or Mr. Maimoon Rasheed at 042-36610681-84.

Javed CalleaAdvisor

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